New U.S. government data shows that personal spending rose by 0.3% month-over-month in June, following larger gains in April and May. After adjusting for inflation, spending in the second quarter grew at an annualized rate of 3.2%, the fastest pace since last summer. As the primary engine of the U.S. economy, consumer spending remains strong enough to support economic expansion.

However, households have significantly drawn down their savings to maintain this level of spending. The personal savings rate fell to 2.7% in June, the lowest level since 2022, compared to double that rate just one year ago. Meanwhile, personal income increased by only 0.2% month-over-month in June, with income growth over the past year reaching nearly 4%, slightly below the historical average.

A breakdown of spending reveals that consumers increased their outlays in June on new cars, healthcare, entertainment, financial services, clothing, transportation, and dining out. Conversely, spending on gasoline fell sharply due to lower oil prices, contributing to a slight decline in monthly inflation for the first time since the pandemic began. However, analysts note that with the collapse of a ceasefire between the U.S. and Iran, oil prices are rising again, suggesting that the inflation relief may be short-lived.

Economists believe that the robust growth in consumer spending seen in the second quarter may not be sustainable. The fading effects of tax refunds, the conclusion of the World Cup co-hosted by the U.S., and a likely desire among households to rebuild savings could all weigh on future spending. Still, Andrew Grantham, an economist at the Canadian Imperial Bank of Commerce, said that while consumer spending has returned to a dominant role, the low savings rate indicates that such strong spending is unsustainable, especially as recent gasoline price increases will again squeeze household incomes.

Despite ongoing inflationary pressures, stable consumer spending remains a defining feature of the current economic expansion, which has now lasted six years. With extremely low layoff rates and unemployment remaining at historic lows, the market generally expects that consumer spending will not contract sharply. In Thursday trading, the Dow Jones Industrial Average and the S&P 500 staged a significant rebound, recouping some of the losses from the previous session.